10 August 2009 Internal T.I. 2009-0321071I7 - Questions Ontario corporations on 2009 T2 return

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. How is a loss carried back from a post-2008 tax year to a pre-2009 tax year? 2. Does a loss carry-back create a tax pool for Ontario's transitional tax debits and credits? 3. Has Ontario's political contributions tax credit become law and is it retroactive to the 2009 tax year? 4. How is the Ontario political contributions tax credit claimed on the T2 return? 5. What is the benefit to a corporation to elect to reduce its federal SR&ED balance for Ontario's transitional tax debits and credits? 6. How does the election tie into T2SCH506? 7. What is the difference between "reference period" and "amortization period" for Ontario's transitional tax debits and credits? 8. What happens when the amortization period is cut short? 9. How is the transitional tax credit applied and carried forward? 10. When will T2SCH500 be updated for the federal business limit of $500,000? 11. When will T2SCH23 be updated for the $500,000 federal business limit? 12. Will the CRA automatically reassess returns where the $500,000 federal business limit was not claimed on filing?

Position: 1. The loss carried back for Ontario purposes must be equal to or less than the federal loss carried back to a pre-2009 tax year. 2. No, a tax pool is not created. 3. Yes, the Ontario political contributions tax credit is now law and is retroactive to the 2009 tax year. 4. The tax credit can now be claimed in a letter filed with the T2 return. In future it will be claimed on T2SCH5 as revised. 5. By making the election, a corporation can reduce or eliminate its regular Ontario transitional tax debits. 6. The election is made in Part 4 of T2SCH506. 7. The reference period is generally 5 calendar years starting at the beginning of the first tax year ending after 2008. The amortization period also starts then but it can be terminated before 5 years for a number of reasons. 8. The shortened amortization period can accelerate the payment of remaining transitional tax debits and accelerate the application of remaining transitional tax credits. 9. The transitional tax credit is not refundable. It can be carried forward and applied to tax payable during the amortization period. 10. T2SCH500 will be released in October 2009. 11. T2SCH23 will be released in October 2009. 12. Yes, the CRA will automatically reassess to allow the $500,000 federal business limit by August 2009.

Reasons: Legislation and timelines for updating computer systems.

August 10, 2009

Memorandum

To: Ryan Young
Team Leader
Toronto North Call Centre
Taxpayer Services and Debt Management Branch

		John Haalboom
		Ontario Corporate Tax Division
		Income Tax Rulings Directorate
		905 721 5193

File: 		2009-032107

Subject: Questions Affecting Ontario Corporations on the Harmonized T2 Tax Return
________________________________________________________________

We are replying to your email dated May 4, 2009 where you asked a number of questions for corporations situated in Ontario on income tax issues in the harmonized T2 return for the 2009 tax year under Ontario's Taxation Act, 2007.

Below, we have provided answers to each of your questions, listed in a question and answer format.

Question 1.1

If there are differences in the incomes reported for Ontario and federally, how is a loss carried back to tax years prior to harmonization?

Answer 1.1

"Harmonization" occurs in tax years ending after 2008. For these tax years, a corporation's income, taxable income and losses for Ontario purposes under the Taxation Act, 2007 (TA) are identical to its income, taxable income and losses determined under the federal Income Tax Act (ITA). The only instance where there can be a different income or loss for Ontario purposes is where Ontario's general anti-avoidance rule in section 110 of the TA has been applied.

Subsection 34(1.0.1) of the Corporations Tax Act specifies that the amount of a loss carried back from a post-2008 tax year and applied to a pre-2009 tax year for Ontario purposes cannot exceed the amount that has been carried back and applied federally for that pre-2009 year. As a result, the loss carried back for Ontario purposes must be equal to or less than the loss carried back for federal purposes.

Question 1.2

When a loss is carried back to a tax year prior to harmonization, will there be an Ontario tax pool created if the Ontario net income amounts are lower than federal amounts?

Answer 1.2

Most corporations will probably carry back the same loss for Ontario and federal purposes from a post-2008 tax year to a pre-2009 tax year. However it is possible for a corporation to carry back a lesser amount of loss for Ontario purposes than for federal. In any case, there is no tax pool created for purposes of Ontario's transitional tax debits and credits when a different loss is carried back.

Question 2.1

Has the measure for Ontario political contributions been passed into law and will it be retroactive to January 1, 2009?

Answer 2.1

Ontario's Bill 162, the Budget Measures Act, 2009, which received Royal Assent on June 5, 2009, introduces a political contributions tax credit for corporations.

Bill 162 converts the tax deduction that was available to corporations making eligible Ontario political contributions under the Corporations Tax Act into a non-refundable tax credit, based on the basic rate of corporate income tax, under the TA. The political contributions tax credit is effective for tax years ending after December 31, 2008.

Eligible Ontario political contributions are contributions made under the Election Finances Act to Ontario parties and constituency associations or to candidates in an Ontario election. Unused contributions, including those from pre-2009 tax years, can be carried forward and claimed for up to 20 years. The annual contributions limit is indexed according to the manner and schedule set out in the Election Finances Act.

Question 2.2

How are Ontario political contributions claimed on the harmonized T2 return?

Answer 2.2

Schedule 5, Tax Calculation Supplementary - Corporations, will be revised to include a new line for claiming the Ontario political contributions tax credit and a new form will be created to calculate and support the claim. The new form will be released in October 2009.

If a corporation wants to claim the credit before the form is available, it should make its request in writing with its return. The request should include the carryforward amount from the Ontario balance at the end of the year in the last Ontario Political Election Contributions - Schedule 2A, the amount of the current year contributions made by the corporation, and the credit claimed.

More information on claiming the Ontario political contributions tax credit is located on the CRA's website at:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/prv/on/pltclcntrbtn-eng.html

Question 3.1

What are the benefits to a corporation of making the election to reduce its scientific research and experimental development (SR&ED) expenditure pool balance on schedule 506, Ontario Transitional Tax Debits and Credits?

Answer 3.1

For purposes of Ontario's transitional tax debits and credits, corporations that perform SR&ED can elect to reduce their federal SR&ED balance as at the start of the first tax year ending after 2008, and therefore reduce their total federal balance and reduce their regular transitional tax debits. They can fully eliminate their regular transitional tax debits where the reduction to their federal SR&ED balance is equal to the difference between their total federal balance and their total Ontario balance.

After making the election, separate additional tax debits are provided under subsection 48(3) of the TA. The SR&ED tax debits are based, in part, on SR&ED deductions claimed for tax years ending after December 31, 2008. However, if the SR&ED performer incurs more SR&ED expenditures than it deducts from income on a cumulative basis in its tax years ending after 2008 and before 2016, the SR&ED tax debits will arise only for tax years ending after 2015. The tax debits arise seven years later than would be the case without the election.

Question 3.2

How does the election to reduce the SR&ED expenditure pool balance tie into schedule 506, Ontario Transitional Tax Debits and Credits?

Answer 3.2

The election to reduce the SR&ED expenditure pool balance is made in Part 4 of schedule 506. If the election is made, Parts 10 to 14 of schedule 506 also need to be completed.

Question 4.1

What is the difference between a "Reference Period" and an "Amortization Period" under Ontario's transitional tax debits and credits?

Answer 4.1

The "reference period" of a corporation begins at the start of its first tax year ending after 2008 and ends five calendar years later but no later than December 31, 2013. The reference period for most corporations is five calendar years or 1825 days starting at the beginning of the 2009 tax year.

The "amortization period" starts at the same time as the reference period and for most corporations also ends at the same time as the reference period. However, the amortization period can end earlier than the reference period.

The amortization period ends earlier then the reference period when any of the following happens:

• The corporation ceases to have a permanent establishment in Ontario (other than because of an eligible amalgamation or eligible post-2008 winding-up),
• The corporation becomes exempt from federal income tax,
• The corporation elects to prepay its remaining transitional tax debit in the year,
• The corporation receives accelerated payment of its transitional tax credit, or
• The corporation participates in a transaction or event one of the main purposes of which is to reduce its transitional tax debit or increase its transitional tax credit.

Question 4.2

What happens when a corporation's amortization period is cut short? What happens to any balance remaining for carry forward?

Answer 4.2

Shortening the amortization period of a corporation has two different impacts on the transitional tax credits of the corporation, depending on the reason for shortening the period.

One impact is that the remaining transitional tax credits of the corporation are accelerated and can be applied in the year against the Ontario corporate income tax payable for the year before deducting the Ontario Research and Development Tax Credit and the Corporate Minimum Tax Credit. This result arises when any of the following events occur in the year to shorten the amortization period of the corporation:

• The corporation ceases to have a permanent establishment in Ontario (other than because of an eligible amalgamation or eligible post-2008 winding-up),
• The corporation becomes exempt from federal income tax, or
• The Minister makes accelerated payment of the transitional tax credit to the corporation.

The other impact on the transitional tax credit arises when the amortization period of a corporation is shortened because the corporation participates in a transaction or event one of the main purposes of which is to reduce its transitional tax debit or increase its transitional tax credit. When this occurs, only a portion of the transitional tax credits can be applied against income tax payable for the year, that portion being the total credit multiplied by the days in the tax year before the transaction or event occurs and divided by the total days in the reference period of the corporation. The rest of the tax credit is forfeited.

Shortening the amortization period also impacts on the transitional tax debits of a corporation. When the amortization period of the corporation is shortened for any reason, the remaining transitional tax debits of the corporation are accelerated and are payable for the tax year in which the shortened amortization period ends.

Question 5.1

Where a corporation has calculated a transitional tax credit but does not have any Ontario taxes payable for the tax year and is not able to apply the credit in the year, can it carry the credit forward? What happens to any unused transitional tax credit, when the reference period or five year period has ended?

Answer 5.1

The transitional tax credit is not refundable and can only be applied against Ontario corporate income tax payable before deducting the Ontario Research and Development Tax Credit and the Corporate Minimum Tax Credit for a tax year.

If a corporation does not have enough Ontario corporate income tax payable in a tax year to be able to apply its transitional tax credit, the corporation can carry the unused credit forward to a future tax year in its amortization period, up to the tax year in which its amortization period ends.

Normally the corporation can fully apply the carryforward credit to its Ontario corporate income tax payable for the year. However, as noted in the answer to question 4.2, if the amortization period of the corporation is shortened in a tax year because the corporation participates in a transaction or event one of the main purposes of which is to reduce its transitional tax debit or increase its transitional tax credit, only a portion of the transitional tax credit can be applied in the tax year and the rest of the tax credit is forfeited.

Any unused transitional tax credit that remains after the end of the tax year in which the amortization period ends, expires.

Question 6.1

When will Schedule 500, Ontario Corporation Tax Calculation, be updated to reflect the increase in the business limit for the federal small business deduction to $500,000?

Answer 6.1

Schedule 500 will be released in October 2009

Question 6.2

When will Schedule 23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit, and the T2 Return be updated to reflect the increase in the business limit for the federal small business deduction to $500,000?

Answer 6.2

Schedule 23 and the T2 Return will be released in October 2009.

Question 6.3

Will the CRA automatically process the T2 return retroactively for corporations who have already filed or will incorrectly file and claim the federal small business deduction with the $400,000 business limit?

Answer 6.3

The CRA will identify returns assessed before the $500,000 business limit was programmed into the CRA's computer system that are entitled to a business limit in excess of $400,000. The affected returns will be reassessed at their applicable Tax Centre with an increased business limit. It is expected that this will be completed in August 2009.

I trust our responses will assist your agents in answering telephone enquiries from corporations on Ontario income tax issues.

Roger Filion
Assistant Director
for Division Director (Acting)
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch